The Death of the Death Tax

October 14, 2010 Topic: Political Economy Region: United States Blog Brand: Jacob Heilbrunn Tags: Tax

The Death of the Death Tax

If Washington kills the estate tax, it isn't coming back.

Is the death tax going to die soon? Nothing incenses the Obama administration more than the prospect of doing away with it. But as the Wall Street Journal reports today, sentiment is rising to trim back or eliminate the estate tax. Over 250 candidates running for Congress have signed a pledge to kill the tax.

Democrats like to point to the dangers of creating a feudal aristocracy in the form of abolishing the death tax. Vast amounts of wealth, they allege, will be permanently frozen in the hands of unworthy heirs, creating a new generation of shiftless dolts, dependent on the largesse of their forbears, providing nothing productive for the economy. But the case against the death tax, too, has something to do with the fairness issue. Is it fair to tax income more than once? After all, federal taxes are not exactly nugatory. As the Journal reports,

the estate tax has become a particularly hot issue in the West, including in Washington state's Senate contest, and some rural House districts where Democratic incumbents appear vulnerable. The tax tends to be a hotter issue in rural areas because it raises particular concerns among farmers and landowners.

As it stands, the estate tax is fiscally punitive. The exemption of $1 million should be raised to around $10 million with a top rate of, say, 25 percent. This would counter fears that Congress was creating an entrenched nobility. Instead, it would amount to tweaking rather than eliminating the estate tax. A wholesale elimination would also be very costly--more than $400 billion in lost tax revenues. Given the budget deficit, it would be an intolerably large sum to forego.

But the estate tax does need to be changed. This would require compromise between Republicans and Democrats. As the 2012 election looms, Democrats will have to decide if they want to reach an accommodation on the estate tax. President Obama is backing a $3.5 million exemption and a 45 percent top rate--still too high.

If current trends are any indication, time is not on the side of the champions of the tax. The longer the Democrats dally, the greater the fervor will grow for dispensing with the death tax in toto. Once killed, it will never come back to life, either.